So the phone rings at a big publishing company in New York. “How long is a book? ” asks the caller.

“Well it varies from book to book and genre to genre,” explained the publishing company receptionist.

“This is a novel. How long is a novel?” the caller asked.

“That varies, too, but many of ours are around 80,000 words,” the receptionist said.

“Thank God, I’m finally finished!” said the caller.

By the same token, how much money does it take to start a technology business? I’ve just spent the summer with more than 30 startups and can tell you the amount varies greatly — more than you could even imagine.

In the simplest sense how much money it takes to start a technology business depends mainly on how much money you have, because it generally takes it all. But all can vary a lot.

The most money raised by any of the Startup Tour companies we visited this summer was $70 million. The least was $5. There were plenty in the $1+ million range but I’d guess the median was around $40,000.

There are plenty of companies that claimed to have not raised any money at all, but that’s not true. The founders of those companies generally went without pay for six months or more, so their companies were self-funded with significant dollars. That makes the $5 company all the more amazing, because it really did start with just $5 — for business cards at Kinkos — and was profitable before the end of its first day in business.

Remember these are companies outside Silicon Valley. Most of the companies we visited this summer had never even met a venture capitalist. Most were funded by family and friends. A surprising number relied on government funding, primarily in the form of Small Business Innovation Research (SBIR) grants.

If there’s a role for government in encouraging tech startups, SBIR defines that role. For those unfamiliar with the SBIR program, federal agencies that spend more than $500 million per year on outside research are required to set aside a small percentage (I think it is two percent) of that money for research contracts with small businesses. The two-phase contracts are for $100,000 and $600,000 to develop technologies of interest to the government. But while the government gets use of the technology, they don’t get to own it or even have equity in the developing company, so from an entrepreneurial standpoint this is ideal.

From what I have seen, the SBIR program is modest, yet extremely successful at encouraging innovation. Perhaps it should be expanded.

Yet that’s about as far as federal success in this area goes. None of the startups had done business, for example, with the Small Business Administration or with SBA lenders. For technology at least, this more traditional program is a non-starter, probably because it is hard to explain to a bank the value of software.

A lot of what we looked at was software, but home equity loans also funded a robotics company and a solar company and probably other companies we didn’t even realize were built on housing bubble money.

The point is that it doesn’t take a lot of money — certainly not Silicon Valley-type money — to start a very fine company. The trick is to either do-it-yourself or do-it-offshore, with the offshore model oddly in decline, probably since there are so many out-of-work engineers in the USA.

One of the more surprising conclusions of the summer is that many of our companies saved so much time by not looking for money that they ended-up not needing the money they might have raised.

Let me explain this last point in more depth. If you spend three months writing business plans and visiting VCs before you have a prototype, then you are three months late (and $X behind) before the first line of code is written or first piece of metal cut. Yet you had to eat during those same three months. Better to go for 90 days on savings or on a 30-second pitch to your rich uncle than to waste three months looking for VC money.

Get a good prototype and the money may come looking for you.

And certainly six months is enough time to know if your idea is going to work or not. So six months of income is the most you should expect to raise or spend from savings.

I don’t care if you are inventing a frigging immortality drug, the same funding rules apply, at least outside Sand Hill Road.

We visited a very promising pharma startup, for example, that had so far spent only $30,000. Yes, a lot more money would be shortly needed for large animal and human trials, but the preliminary work was done, their basic IP was protected, and no equity was burned in the process.

It’s painful for them now, but in the end each of these companies will be glad they were so careful with their spending.

Not that they all were so careful. Home equity money circa 2006 was so abundant many of our founders made stupid mistakes. But to make our list they also recovered from those mistakes. And when you look at the dollars that actually bought the right stuff, they generally came down to that same $30-40K.

So how much money does it take to start a technology company? Less than you think. Maybe even less than you have.﻿

53 Comments

By tomorrow the SBIR will be inundated with inquiries, you heard it here first….

BozoTheClown
September 12, 2010 at 10:29 pm

first

BozoTheClown
September 12, 2010 at 10:56 pm

…to get serious…

Money is a factor, but isn’t it also the personal struggle and surviving the passage of time?

1945: “I was excited about achieving a career in physics. My family, being more practical, thought the most desirable position for me would be as an elementary school teacher.”

1956: Their original report about insulin antibodies, however, was rejected initially by two journals. Finally, a compromise version was published that omitted “insulin antibody” from the paper’s title and included some additional data indicating that an antibody was involved.

No surprises there. The Queensland University of Technology has been running a study on roughly 1000 (technology) start-up companies. They could only find one which had had venture capital and another one with an angel investment.

Bob, I look forward to hearing more about the tour. This piece was comforting to read as this is the path that we followed to start Atomic Greetings. We did have a brief flirtation with the idea of VC money but soon realized that we’d have to stop moving the company forward in order to satisfy the demands of a funding hunt.

I think we made the right choice as our product is launched and selling into both the consumer and business markets.

A lot of startup businesses forget . . . the best source of cash is: customers.

Too much money and businesses start to think they are “in business” (that is viable going concerns), without any customers. I saw it several times during the dot com boom, from the inside. No paying customers == no business.

Bob,
I like to tell people the answer to “When is the best time for a start-up to raise money from investors?” is the same as the answer to “When is the best time to put your foot in a cast?” Answer: NEVER.

However there are rare situations when selling equity to investors (like putting your foot in a cast) makes more sense than the alternative. However with the lowering of tech costs we’ve seen in the last 5 years, those situations are becoming more and more rare.

I don’t have the stats on this but I bet more companies have been funded that never should have been, than companies that got still-born only because they didn’t raise investor money.

Hey! Business seems like something of a nerd’s job but none has given me such quality explanation to how does things go actually in the real time environment. I salute the writer for his explanation. The text actually got me going through the whole blog

KLH
September 14, 2010 at 4:00 pm

I would be interested to know if any of these startups used an incubator…

I would also be interested to know if Bob noticed any relative advantages based on how the startups dealt with administrative (payroll, legal, insurance) needs – or if those needs ultimately “distract” the company from offering its product or service.

-KLH

Pekka
September 14, 2010 at 11:40 pm

“…probably because it is hard to explain to a bank the value of software.”

– Ain’t that the truth.
In my experience banks do value collateral.
The problem with IT startups is that money invested is usually to a very low degree invested in stuff which has little or no stable collateral value.
This, combined with bankers’ memories from the dot.com -bust makes them vary of IT startups.
No collateral, and (valid) skepticism towards earning models and forecasts = no loan.

I’ve tried to suggest to the government (over here) that long-time unemployed, who start their own companies (who go into self-employment) would continue to receive unemployment benefits until they start making more than the value of the benefit.

As with many government programs, access to information, standardization and process transparency have been challenges for the SBIR and STTR program. Their are efforts underway to help address those issues from the private sector like SBIR Source: http://www.sbir-sttr.com

All-in-all, lots more can be done to provide early-stage, non-dilutive capital to tech startups.

One additional comment – many states either pile-on additional funds for SBIR winners or offer similar programs – it’s another funding source companies should not ignore.

Frankie
September 16, 2010 at 2:09 pm

Backlink spammer. Remove post.

Ross
September 15, 2010 at 11:22 am

Hey Bob, how is your lunar rover coming? Here would be a great place to send it, to explore a lunar underground lava cave:

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